Analysis: What’s behind bitcoin’s latest surge?

LONDON, March 22 (Reuters) – At the turn of the year, Bitcoin found itself in the grip of a bleak midwinter, after a 2022 marked by falling crypto prices, bankruptcies and corporate scandals.

Less than three months later, Bitcoin has gotten its mojo back. Having gained more than 70% so far this year, it has outperformed other major assets to trade near its highest level in nine months on Wednesday.

The original and largest cryptocurrency has been here before, its 15-year history riddled with dramatic price increases and equally dizzying falls. Fueling Profits: Interest Rates.

Markets are anticipating central bank hikes in the cost of borrowing to peak, and such a scenario will boost risky assets like bitcoin, six crypto and traditional finance investors and analysts told Reuters.

“The macro narrative is number one,” said Noelle Acheson, an economist who has followed the crypto sector for the past seven years. “Bitcoin is not only a risky asset, but of all risky assets it is arguably the most sensitive to monetary liquidity.”

Other factors are also at play, from turmoil in the banking sector to ongoing hopes — which have yet to materialize — that bitcoin can find widespread use as a means of payment.

Bitcoin closed its best week in four years on Sunday, gaining 45% in just 12 days.

As the collapse of U.S. lenders Silicon Valley Bank and Signature Bank helped prompt rival UBS’s takeover of 167-year-old Credit Suisse on Sunday, claims that Bitcoin is an asset immune to risk in traditional finance have mounted gained importance.

“It’s pretty narrow-minded to say Bitcoin will thrive because a bank failed,” said Usman Ahmad, CEO of Zodia Markets, the crypto exchange of Standard Chartered’s venture arm (STAN.L) and Hong Kong-based crypto -Company BC Technology Group.

“But trust is almost a critical factor – trust in the banking system is damaged.”

According to analysts, the main user base of retail investors was the reason behind Bitcoin’s gains. Institutional investors like pension funds, who have previously been suspicious of the unstable and mostly unregulated Bitcoin, are likely to be skeptical of a long-lasting renaissance for the cryptocurrency, the interviews indicated.

“Bitcoin’s recent bull run appears to be mostly supported by individual investors – from retail to whales – as we’ve seen evidence of institutions exiting during this rally,” said Zhong Yang Chan, head of research at crypto data firm CoinGecko.

In fact, bitcoin investment products favored by larger investors saw $113 million in outflows last week, according to digital asset manager CoinShares, which attributed the moves to a struggle for liquidity amid the chaos in the banking sector.

DÉJÀ-VU?

In the past too, dramatic price swings for Bitcoin have been closely linked to changes in monetary policy around the world.

As stimulus measures swept through the global financial system during the COVID-19 pandemic, stay-at-home investors fueled a six-fold rally for Bitcoin between September 2020 and April 2021.

These moves, coupled with surging interest in crypto from larger investors and corporations, prompted crypto supporters to vow there was less likelihood of a blue collapse historically seen following Bitcoin rallies.

But when signs of runaway inflation forced central banks and governments to rein in stimulus packages in late 2021, Bitcoin plummeted by more than half from its record high of $69,000 in just 75 days as interest rates began to rise.

In 2022, Bitcoin plunged over 65% as higher prices triggered the fall of a major crypto token and accelerated the shutdown of major hedge funds and crypto lenders. It was further weakened by regulatory headaches and the dramatic decline in the FTX exchange.

The disastrous year was another reminder of Bitcoin’s vulnerability to external shocks, despite claims from supporters that it is a safe haven in times of political and economic stress.

Certainly, some investors say that the development of Bitcoin’s intrinsic properties is now able to support its price. For example, Richard Galvin of crypto fund Digital Asset Capital Management cited software upgrades that have enabled a new breed of non-fungible tokens on Bitcoin.

However, doubts remain for investors in traditional investments.

“I don’t know if old-school currency experts are reevaluating it,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets. “We’re still wrestling with Bitcoin over the definition of a currency.”

Reporting by Tom Wilson, Editing by Louise Heavens

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